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Blockchain and Competition – SIMPSON – June 2018 OECD discussion

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This presentation by Mark Simpson, Partner, Norton Rose Fulbright, was made during the discussion “Blockchain and Competition” held at the 129th meeting of the OECD Competition Committee on 8 June 2018. More papers and presentations on the topic can be found out at oe.cd/2gx.

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Blockchain and Competition – SIMPSON – June 2018 OECD discussion

  1. 1. OECD: Blockchain and Competition Policy Blockchain and Anticompetitive Collusion Mark Simpson Partner Norton Rose Fulbright LLP 8 June 2018
  2. 2. Agenda 2 • Context & Concepts • Competitor collaboration: what is the concern? • Establishing a blockchain platform • Operating a blockchain platform • New opportunities for collusion? • Options for regulators
  3. 3. Overview: different types of blockchain exist 3 Public Blockchain (“Permissionless”) Private Blockchain (“Permissioned”) Consortium Blockchain Access Open Authorisation only Authorisation only Validators Permissionless, anonymous Permissioned, identified Permissioned, identified Approval Process Consensus (proof of work / proof of stake) Voting by approved participants Voting by approved participants Permissionless, Public, Shared Systems (eg Bitcoin) Permissioned, Public, Shared Systems Permissioned, Private, Shared Systems Today’s Typical Systems Centralised Ledgers Distributed Ledger Technology Covers a Broad Set of Usages Different ledger technologies vary in their ‘degrees of centralisation’ UK Government Chief Scientific Adviser, Government Office for Science, Distributed Ledger Technology: Beyond Blockchain, 2016 100% Decentralised 100% Centralised
  4. 4. The “Consortium Blockchain” concept 4 Sector Automotive Industry Trade Finance Freight & Logistics Name Ocean Shipping Logistics Consortium Participants Application Making mobility services more efficient, affordable, greener, safer, and less congested Managing, tracking and protecting trade finance transactions between SMEs Digitalisation of international logistics movements
  5. 5. Competitor collaboration: what is the concern? 5 People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Adam Smith, The Wealth of Nations (1776) But accessing information is fundamental for markets to function and enabling pro- competitive outcomes which tend to increase general consumer welfare: • Solving information asymmetries; • Increasing internal efficiencies through effective benchmarking; • Efficient management of inventories; • Improve choice for consumers
  6. 6. Establishing a blockchain platform 6 Enhanced opportunities for collusion: • Critical mass of competitors involved; • Monitoring compliance. Blockchain consortia can face divergent incentives… Procompetitive objectives: • Improved provenance; • Efficient transactions; • Wider range of services. Spillover Risk… • Blockchain consortia often involve direct competitors, increasing chance of collusion in same or related markets; • Situation similar to planning discussions for classic R&D joint ventures – mitigation strategies may involve:  Seeking advice from external advisors;  Clean teams and information sharing protocols;  Vetting of information by external advisors or non-competing participants; • Collective boycott – what is the extent of participants’ obligations to engage with others seeking admission to the consortium? • Standard setting – could agreed standards foreclose competing technology and / or be discriminatory?
  7. 7. Operating a blockchain platform 7 Information Exchange… • Blockchains can increase market transparency, as each participant possesses a complete copy of the ledger, which contains details of all transactions • Competitive sensitivity increased by near-instantaneous recording on transactions • However, the nature of the information actually stored on the (publicly) accessible ledger varies between applications (increased privacy via zero knowledge proof) • Consortia blockchains can grant different permissions to classes of participants Block 1 Block 3Block 2 Block Header Time Stamp Messages Hash Block Header Time Stamp Messages Hash Block Header Time Stamp Messages Hash Transaction data is stored on the ledger in hashed form, but can be decrypted by participants Transaction data is not stored on the ledger, but rather “pointer” hashes link to addresses of off- blockchain storage locations A B Or… Key question: what information is visible on the ledger?
  8. 8. Blockchain Technology Smart Contracts Could be used to implement anticompetitive agreements via a blockchain platform e.g. price fixing, RPM Pricing Algorithms Already subject to investigation by competition regulators: • CMA – Online sales of posters and frames (2016) • EC – investigation of Pioneer, Philips, Asus (2017 - ) Collusion between Miners • Economies of scale have led to concentration of mining power in hands of few players: CR5 = c. 70% • Incentive to collude to implement “51% attack”? Collusion between Blockchains • First mover advantage and pursuit of network effects makes collusion unlikely? 8 New opportunities for collusion? Cryptocurrency Manipulation May 2018: DoJ begins criminal investigation into traders allegedly manipulating cryptocurrencies via techniques such as “spoofing” and “wash trading”
  9. 9. Various options for regulators… New Rule-based Regimes? New (Principles- based) Guidance? Regulatory Sandbox? 9 • E.g. New block exemption regulation for blockchain consortia with x% share of horizontal market • But firm rules likely to be rapidly superseded by new applications • E.g. updates to Guidelines on horizontal co-operation agreements with Commission’s view on when transparency is likely to raise concerns • Some form of commentary appropriate to promote innovation and avoid stifling pro- competitive benefits • Obligation on parties to self-assess should remain • I.e. environment for businesses to test innovative products without risk of being ‘punished’ by regulators • Deployed by UK’s Financial Conduct Authority in respect of financial services regulated activities • More appropriate for ex ante regulation than ex post regulation? (if the former, could a competition sandbox apply to merger control of blockchain consortia?)

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